The EU’s Retail Investment Package Targets Undue Costs for Consumers

PUBLISHED: 14th June 2023

A Retail Investment Package was adopted by the European Commission on 24 May 2023, which focuses on investor protection. 

It is hoped that the Package will empower retail investors (or consumer investors) to invest with confidence in EU capital markets.

The Package includes proposals for wide-ranging changes to a number of EU Directives with a particular focus on value for money and inducements. 

The proposed changes to the existing UCITS and AIFMD frameworks aim to strengthen the pricing processes of undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIFs) (Funds).  Those changes will have implications for UCITS management companies and alternative investment fund managers (FMCs) in the identification, analysis and review of costs and, most importantly, the prevention of “undue” costs being charged to investors. 

Background

The Strategy comprises an amending Directive and Annex (Omnibus Directive), which revises the existing rules set out in the Markets in Financial Instruments Directive (MiFID II), the Insurance Distribution Directive (IDD), the Undertaking for Collective Investment in Transferable Securities Directive (UCITS Directive), the Alternative Investment Fund Managers  Directive (AIFMD), and the Insurance and Reinsurance  Directive (Solvency II), as well as an amending Regulation, which revises the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs). 

While most of the Package’s proposed changes are to MiFID II and the IDD, we have focused below on the key implications for FMCs in respect of the costs borne by investors, as a result of proposed adjustments to the UCITS and AIFMD frameworks. 

This Package comes hot on the heels of the Central Bank of Ireland’s “Dear Chair” letter, of March 2023, which outlined its expectation that FMCs should implement clear pricing policies and procedures, and review costs charged to investors at least annually, in the Funds that they manage. 

Key Takeaways from the Omnibus Directive for FMCs on Undue Costs

1. Amendments to the UCITS Directive and AIFMD will define the conditions for considering whether costs are “due”, and the rules in the pricing process to ensure those conditions are met.  The finer detail will be included in Level 2 regulatory technical standards (RTS), which will also outline “eligible costs” that may be charged to a Fund (and on what basis the national competent authority (NCA) may allow costs not included in this list).
2. FMCs must show that costs are justified and proportionate.  ESMA will prepare benchmarks, against which (where available) FMCs will need to carry out “value for money” assessments during their annual reviews of the costs borne by the Funds that they manage.  Higher costs will be deemed “undue”, unless additional testing establishes them to nevertheless be justified and proportionate.  Otherwise, the Funds may not be marketed to retail investors.
3. FMCs will be required to pay compensation to investors where “undue” costs have been charged, and this information will have to be reported to the FMC’s NCA; as well as the relevant Fund’s NCA, auditors and depositary.
4.  Reporting obligations on FMCs will require them to regularly provide information to their NCAs on the costs borne by investors in the Funds that they manage, and the performance of the relevant Funds, sub-funds or share classes.

What Next?

As of today, the Package is open for feedback from 25 May 2023 to 9 August 2023 (this end date is being extended daily until the Package is available in all EU languages).  All feedback received will be summarised by the European Commission and presented to the European Parliament and Council of the European Union with the aim of feeding into the legislative debate.  Negotiations in the Council of the European Union and the European Parliament will follow.  April 2024 is the deadline for any possible agreement between the co-legislators and for the European Parliament to adopt its report ahead of the new parliamentary elections.  ESMA will then develop its RTS. 

FMCs should:

1. Consider providing feedback to the European Commission during the consultation process;

2. Continue with their gap analyses of the costs and charges borne by the Funds that they manage, in order to identify and address any gaps by the end of Q3 in line with the Central Bank’s “Dear Chair” letter; and

3. Ensure that appropriate procedures and policies are in place to strengthen existing pricing processes and support the annual review process going forward for those Funds.

Further information on the Retail Investment Package is available here.

Contact Us

For further support in actioning the “Dear Chair” letter, and on further developments relating to the Retail Investment Package, please contact a member of our Financial Services team: David Naughton, David Williams, Katrina Smyth, Narita Woods or Mina Dawood.